Kyle Green on MoneyTalks
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Maybe the biggest story in finance, certainly for millions of Canadians, is they're going to be renewing their mortgage. We had a Bank of Canada with a big warning a week ago saying, hey, look out, especially, you know, as we go through 24, but more so in 25 and 26, you know, people got a great mortgage rate in 2020, five-year rate, five-year rate to 21. Well, they're getting renewed.

had me thinking about a lot of questions. And I thought, hey, I know who to go to. I'm going to go to Kyle Green of the Green Mortgage. Green Mortgages, of course, have been around for a thousand years. Not Kyle. He doesn't look it at all. But my point being, Kyle, here's a question I've had. I look at the economic stats about what's going on in Canada.

what's going on in the US. One of the big differences though, is that their most popular mortgage is a 30 year mortgage. You know, like something like 90% of people have a 30 year. So yes, we've had the same kind of big jump in interest rates down there, not impacting people anywhere near the same as they are here. So I've been wondering, why don't we have longer term mortgages? And I know they post a 10 year, usually not very attractive rate, but I'm just wondering what's behind that, that,

Again, a lot more stability would be into our system if we could have longer mortgages. Yeah, yeah. It's just a different system up here. So in general, down in the U.S., your term and amortization tend to be the same. It's a 30-year or 25-year term and amortization. One of the interesting things that you see then is in the U.S., it seems like the real estate market is slowing down more than in Canada because in the U.S.,

you can't port that mortgage and take it with you if you buy a new property. So you kind of are stuck in the same home. Whereas in Canada, we haven't seen as much of a slowdown in the real estate market because you can take your shorter term with you to the new property. So that's why I think that we've seen a bigger slowdown in the US on that front. But on the flip side,

we've seen a bigger slowdown in our economy because our costs are going up because of our shorter term nature mortgages. So, you know, a good percentage of people are in variable rate mortgages, probably about 35% or so of Canadians.

And of course, we've already seen that as those interest rates have risen, so then have the payments. But in addition to that, most people are taking a five-year term or even less than that. And I think that the issue, of course, is that a lot of those mortgages are coming up for renewal. You know, we're already seeing a lot of renewals coming up this year, but really 2025 and 2026 is where you're going to see a lot of those renewals. 2021 was the busiest year that most brokers have seen and

probably their entire career. And most of those terms are five-year terms.

I like your point, though, and I should have started with it is that, of course, it depends on the mortgage. As you say, people got variable rate, they got variable rate, but fixed, you know, so the amount they pay monthly stays the same, basically, you know, but less goes to interest or more goes to principal, whatever it is, you know, so that's an important distinction. Because again, on that Bank of Canada report, I mean, it was an eye popper should have been my shocking stat, because some people, you know, have watched like a 60% jump.

you know, in their monthly payments coming out of one of the variable rates. And wow, you know, and that's not affordable. You know, I expect to see the fallout from that. As you say, look at 25, look at 26. We're not done yet. Yeah. Yeah. And one of the reasons that it's different is just if you,

If you look at how banks fund mortgages, what they're doing is they're lending out money to people like you and me, bundling up those mortgages and then selling them out the back door. The reality is that when international investors are buying these bundles of mortgages, they're also making a decision to invest in that country too.

it's a lot easier for the US being the global currency to attract 30 year money because people can foresee and say, you know what, in 30 years time, I think that the US is still gonna be around and in a solid state. And Canada's a little bit harder to raise capital on such long terms. And so we get up to about 10 years and that's the maximum that you're typically looking at. When you go above that number, it's just the banks don't really have a funding source. It's hard to attract money into Canada for more than 10 years.

It's a great point in that I talked to EJ, your old parliamentary budget officer, a few times, but I remember specifically going back to November 220 and asking him, I mean, my goodness, the government's issuing so much paper, right? Because we were having massive deficit spending. But I said, why aren't they going longer term? You know, I mean, hey, these are great rates. I was recommending to everyone who listened to me, you know, lock in, go long. It's more for me, it was over financial instability worries, you know, which I still have in some degree. But

But I said, and I said, so why aren't we selling them? And his answer, I'll never forget. He says, because there's no buyers. Yeah. Like there was nobody on the other end of that. They didn't want our 20 year paper, you know, so your point's very well taken that you can't match the loan with the security at this point. And, you know, as you say, that's a big difference between us and the States. You know, it is the currency that people sell.

still around the world go to. And so they can raise that 20 and 30 year money. But even on the 10 year, you know, I've heard from different bankers that it's just more expensive for them. One of the issues I heard was that, you know, let's say they take out 10 year security, lend out the 10 year money.

but then I break that mortgage. Now they're stuck with that security on the books that they don't necessarily want it. It was matched up. So they said that was getting more expensive for them. So things like that also play a part, it seems to me. Yeah, it does. And there's an interesting clause in the Bank Act, actually, in Canada, where if you fund a mortgage, if you've been in that mortgage for longer than five years, the maximum penalty is three months of interest. And so

And so they cannot charge the interest rate differential penalty. So if a couple of years ago people took a bunch of 10 year money and they're at, you know, two and a half percent or 3%, there gets me points where you can actually break those mortgages and nobody would break it if you took it at just a couple of years ago, because of course you're at a lower rate than where rates are at. But if the flip side happens, so people take 10 year money today and then rates drops considerably,

people could break that mortgage and just pay a three-month interest penalty at the five-year mark and get out of it and then redo it and get a new five-year term. So it's very risky for the bank on the downturn because of the Bank Act in Canada. No, that's such a wonderful point. And of course, if they're going to pass on that risk, that extra expense, that partially at least explains why the 10-year rate never looked that attractive. You know, I mean, my five-year just looks way too much...

way better, you know, and that that's a great explanation of why that is. I guess then we heard this year that there are banks extending amortization periods and things like that. How prominent did you find it in your business? You're, you know, green mortgages is a very big broker. You do a lot of business. Did you find that all of a sudden the surge?

Yeah. So one of the things that happens is that's more so we would see it, but we don't deal with it and negotiate that a whole lot. So usually what would end up happening is if somebody is in financial distress, then they would we would usually encourage them to if there's no other options, of course, encouraging them to go back to the bank.

and ask for some way to assist them. And usually that would be extending that amortization. And in fact, some cases they would extend the amortization past the 30 year mark. We saw some people in some banks that were extending it to 40 year amortizations almost automatically if you were asking for it. So at the end of the day, the bank doesn't want to have defaults and they want to accommodate this and try to find options and solutions for people to ensure that they can stay in their home and they can still pay them

And that's something that we saw a fair bit. Another thing we see too is with the renewals coming up,

If you bought a property five years ago, let's say, and you bought with 25 year amortization, you're down to 20 years. A lot of people are finding that they can keep the payment the same as what they were at before by re-extending to 30 years. And I know that sounds crazy to 10 years onto the life of your mortgage, but it keeps the payments the same. And so a shockingly large number of people have opted to re-amortize it, even though getting a 30 year amortization usually costs a bit more in the mortgage. But keeping the payment the same was their primary objective.

Yeah. As I say, it's quite an environment for people to be working in unprecedented jump in rates. First, the decline in rates was unprecedented. Now the jump in rates is unprecedented. So people are scrambling. And I go, this is such a broad question. Just sort of I don't expect a specific answer. But someone walks in the door right now and, you know, wants to initiate a mortgage.

Are you telling them five or do you say, here's what a 10 would cost? Here's what a seven would cost. Here's the best I can get you at a five. That kind of thing is what's that conversation look like?

Yeah, it really depends on the borrower, of course. But I would say that if I was to rank the terms in order of the number of people that are taking them, the three-year fixed is the most commonly chosen term by a large margin. And then the five-year fixed and the variable are about the same. And then probably a two-year fixed, etc. So the current situation is that short-term rates are more expensive than long-term rates until you get up to five years. So a one-year might be close to six.

six and a half, 7%, two year might be six, six and a quarter, three year drops to five of, you know, five and a quarter to five and a half, somewhere in there. And then the four and your five year are only about 0.1% or 0.2% lower in most cases other than insured mortgages. So you get diminishing returns to go longer than three. So the three year seems to be that good mix of not too short of a term where you're paying a high rate, not too long of a term where you're stuck in a rate that's fairly high and especially with the expectations of rates will drop.

Technically, based on the Bank of Canada predictions in the swap markets where people are making predictions of where the Bank of Canada is going to go, if you get a deep discounted variable above prime minus one or so, a variable is showing that it will outperform a fixed. But those same people that are making the predictions also predicted years ago that rates would not have increased this much. And so people are very hesitant to place that bet right now.

I'm always so conservative on that. I think I've got lots of ways to play different things, including interest rates. You know, I can show people a lot of vehicles to play what they think interest rates are happening. My home hasn't been one of them, you know, on that. But I'm sure you're inundated and I appreciate you finding time for us today to share with us your expertise. Of course. Thanks for having me. Great, Kyle. Kyle Green, Green Mortgage.